Why the 2013 PEFO was a misleading Pixies, Elves & Fairies Outlook

Over the past decade, and more, Australians and their governments used a temporary boom to finance permanent promises to ourselves – everything from a record eight tax cuts in a row through to family benefits and a national disability insurance scheme.

By 2013 those mistakes had become glaring.

Yet that’s the year in which this nation managed to double down on our own dumbness: we actively encouraged an election between two sides who promised to do the impossible – to add heaps more to spending, and yet to also get the budget rapidly back to surplus.

Here we are in 2016, another election year. Are we about to invoke Einstein’s definition of insanity: doing the same thing over and over again and expecting a different result?

Perhaps the upcoming Pre-Election Fiscal Outlook will set us straight? Or perhaps not. After all, the 2013 PEFO was an epic fail.

Fig leaf

The then government hit upon an ingenious fig leaf. It noted that, if spending could be held to inflation-adjusted growth of no more than 2 per cent a year for a decade, that would get the Budget back to health.

So it committed to that. Yet at the same time it also committed to individual policies that implied spending, after inflation, would grow beyond the forward estimates by 3.7 per cent a year for a decade.

In other words there was a massive gap between:

Specific spending policies that were generous, and

A commitment to keep overall spending gains austere.

That gap was never explained. The difference between those two trajectories was over $80 billion by 2023-24.

By way of yardstick, if Australia abolished the age pension – if every oldie got nothing – then that would not generate the savings that were being promised.

Yet nothing was ever offered up to meet these savings.

Such shortfalls are common in the US, where empty promises to do something are dubbed “the magic asterisk”.

Then along came PEFO. Surely it would blow the whistle? After all, although Treasury and Finance may be the servants of the government of the day almost all the time, the sole exception is during an election when – via PEFO – they can give their independent opinion.

Promise to do something

So surely Treasury was about to point out the then projected return to healthy surpluses was built upon a promise to do something, but with no specifics behind that promise?

Yet PEFO let it go through to the keeper. No straight talking. No telling it like it is. Nothing like what Treasury says to an incoming government in the so-called blue and red books prepared for incoming administrations.

In fact, the 2013 PEFO not only swept the huge hole in spending projections under the carpet, it assumed the massive pay rise that China’s emergence had delivered to the Budget would linger, with the nation’s terms of trade projected to fall by only 11 per cent between now and then.

Yet the actual fall has been double that, and there are risks of more to come.

So the 2013 PEFO essentially assured voters that:

Within a decade, whoever they voted in would come up with over $80 billion a year in expenditure savings

And that much of the revenue windfall from earlier years was locked in.

Err, that’d be “no” and “no”.

State spending

We didn’t get a Pre-Election Fiscal Outlook. What got served up to the Australian public was a Pixies, Elves and Fairies Outlook.

The bad news is that Canberra is still trying to hide a chunk of the problem – just in a different way. Whereas a few years’ back the magic asterisk came down to promising spending cuts but never saying what they would be, this time the biggest savings in the forward estimates rely on cutting state spending on hospitals and schools.

To be clear: This money was never actually funded in the first place, and it may well have been too generous anyway.

But a combination of demographic driven costs (both more oldies and more kids) imply a sharp lift in spending, and that becomes worse still once you allow for the rapid inflation in health-care costs.

Simply telling the states that they’re “on their own” is no solution to that.

Or, in other words, the magic asterisk is still there.

So the Australian electorate is at risk of sleepwalking through another election campaign in which official figures ignore the bleeding obvious – that our budget settings are far from fixed, and that spending cuts and tax increases will be needed before we can rid ourselves of the hangover we incurred during the decade in which we responded to a temporary boom with permanent promises.

In 2013 the then shell game hid the problem under a promise to do something. Roll on to 2016, and today’s shell game is premised on the promise that the states will do something.

Yet the states barely raise any taxes of their own – and some of those they do raise are among the worst when it comes to damaging jobs and growth. Sure, they could be better at both cutting spending and raising taxes, but they can’t fill a hole of the size that’s looming.

Elephant in the room

So will the PEFO of 2016 address the elephant in the room in the way the 2013 PEFO failed to do? I’m not optimistic. After all, the new magic asterisk involves a hospital pass to the states, whereas PEFO is a report on the federal budget.

So Treasury and Finance can choose to, once again, play safe.

If they do, the Australian electorate will once again be surprised when the federal budget remains just as broken today once the screams from the states inevitably lead to new raids on Canberra’s piggybank.

So this year’s PEFO looms as being an even more significant moment in Australians’ social compact with themselves – our federal budget.

Hence my plea. Like the red and blue books now being prepared, Treasury and Finance can choose to tell it like it is to all Australians ahead of the election, rather than solely to the new government after the election.

Life hands you a handful of moments to stand up and be counted. For the authors of PEFO, this is one of those moments.

Chris is in charge of the Deloitte Access Economics’ forecasting and policy unit and is one of Australia’s best known economists. A highly sought after commentator and presenter on economic trends in both broadcast and print media, he is also the author of Business Outlook, a leader in its field ...